Science & Mathematics Time to test your greed

[Nothing]

And if you can’t find a very comfortable home in any Australian city from under, $1m, suffice to say you have expensive tastes.

Median house price is ~$550K for Melbourne, Sydney and Perth. After associated costs you have $400K left over and you are only in an average house. Most people would buy a new car, go on a holiday and have ~$300K left in no time at all. You're still going to need to work the rest of your life (just in an average home)

Except this isn’t a “financial decision”. We’re not talking about an investment decision here. You can’t influence the outcome through good management or hedging your position. It’s pure dumb luck, a coin toss. You wouldn’t approach it as you would any other financial decision, where you have some control over the outcome.

It is a financial decision. It is about a known return on investment (risk $1m for a 50% chance of $100m). Do you invest in shares? Property? You do not control the outcome of these events, you can do research and select on good management/research/etc but at the end of the day you are relying on the weight of probabilities of all the possible outcomes.

I think any rational person would take the sure thing and the known outcome. It’d depend on your own circumstances etc as well of course - $1m would change some peoples’ lives, for others it’d just be another mil.

As was pointed out by Lenny, your current situation does have some bearing on what is best. But I can assure you that the rational decision is not (always) to take the $1m.

 

[Caesar]

Can't believe the poll is so one sided.

 

[Jmac2225]

Can't believe the poll is so one sided.

What is the tally? Can't see on tapatalk.

 

[Nothing]

What is the tally? Can't see on tapatalk.

~80% take the $1m

 

[Bunk Moreland]

Median house price is ~$550K for Melbourne, Sydney and Perth. After associated costs you have $400K left over and you are only in an average house. Most people would buy a new car, go on a holiday and have ~$300K left in no time at all. You're still going to need to work the rest of your life (just in an average home)

Yes, but the main points being (a) you can easily afford a very comfortable home, and (b) you’re completely free of your biggest single living expense, possibly for the rest of your life – putting a roof over your head (rent / mortgage). That will have a massive impact on the financial, career and life decisions you’re able to make.

Of course you’ll still have to work, but within that there’s a shitload of options – a whole lot more than you may have when you need to pay for a home to live in.

It is a financial decision. It is about a known return on investment (risk $1m for a 50% chance of $100m). Do you invest in shares? Property? You do not control the outcome of these events, you can do research and select on good management/research/etc but at the end of the day you are relying on the weight of probabilities of all the possible outcomes.

Yes, the balance of the probabilities. Which work in your favour when investing, as you spread your risk and thus ensure some level of return (to a very high probability of success).

It doesn’t work this way here. Presuming this is a strict question (ie you can’t hedge your bets with others etc), it’s a single decision. And it’s pure dumb luck.

As was pointed out by Lenny, your current situation does have some bearing on what is best. But I can assure you that the rational decision is not (always) to take the $1m.

Agree. But as I said, I think for average Australians of average wealth, the rational decision would be obvious.

 

[Nothing]

Agree. But as I said, I think for average Australians of average wealth, the rational decision would be obvious.

The average net worth of an average Australian was $720K in 2009/10. Adjusting for inflation that would be ~$830K in today's terms. The reality is that assets have increased significantly (particularly shares) since 2009-10 (which was the low point of the share market) and it would likely be even higher than that now.

 

[SHAKESPEARE]

50% at 100m

 

[Bunk Moreland]

The average net worth of an average Australian was $720K in 2009/10. Adjusting for inflation that would be ~$830K in today's terms. The reality is that assets have increased significantly (particularly shares) since 2009-10 (which was the low point of the share market) and it would likely be even higher than that now.

An average Australian household, yes. Not individual. Our households have about 2.5 people each.

In any case, $1m would be more than a 100% increase in the average Australian’s wealth. That’s pretty good and a very significant whack.

 

[Jmac2225]

The average net worth of an average Australian was $720K in 2009/10. Adjusting for inflation that would be ~$830K in today's terms. The reality is that assets have increased significantly (particularly shares) since 2009-10 (which was the low point of the share market) and it would likely be even higher than that now.

Reaffirming bunks point that figure would includes assets making it less relevant when speaking in relation to the question in the OP.

The average Aussie might be worth 830k but that doesn't necessarily translate to a heap of money in the bank.

I.e. my net worth would be around 350k thereabouts but in reality I only have $500-$1000 in the bank at any given time.

 

[Andre]

Can't believe the poll is so one sided.

Yep. Very surprised. I wonder at what percentage the $100 million option becomes much more popular or if it's gradual. I'd guess if you asked a 1000 people on the street at 50% and another 1000 at 51% you'd get a fair bit more at the later. Sort of like "It's less then $20! Only $19.99!". Except "More chance of winning! I'll take the chance.".

 

[treefingers]

Mathematically, it's the right option. You need to make financial decisions based on maths not emotion, otherwise they are not financial decisions. Conversely if it was a 1% chance to win $100m or a guaranteed $1m, I would take the $1m. Any percentage above that and you are better off taking your chances.

I'm surprised at how far people think $1m will go, especially those who are talking about buying a home with it.

I'm very mathematically minded and I know all about EV, don't get me wrong.

But for example if there was a 2% chance of getting 100 million and 98% chance of nothing, mathematically taking the 100 million risk would be "correct" option as the EV would be 2 mil compared to 1, but I would for sure take the 1 million guaranteed.

Emotion definitely comes into it, as someone said earlier you would be kicking yourself if you effectively turned down a free million due to greed.

I guess it all comes down to how high would the probability of the 100 mil have to be for you to take it. Anything upwards of 75% and I would probably roll the dice, but then again I might not if it actually got offered to me. Hypothetically of course

 

[Nothing]

I'm very mathematically minded and I know all about EV, don't get me wrong.

But for example if there was a 2% chance of getting 100 million and 98% chance of nothing, mathematically taking the 100 million risk would be "correct" option as the EV would be 2 mil compared to 1, but I would for sure take the 1 million guaranteed.

Emotion definitely comes into it, as someone said earlier you would be kicking yourself if you effectively turned down a free million due to greed.

I guess it all comes down to how high would the probability of the 100 mil have to be for you to take it. Anything upwards of 75% and I would probably roll the dice, but then again I might not if it actually got offered to me. Hypothetically of course

Life doesn't give you +EV opportunities that often. You have to take them when they present themselves.

On the 'kicking yourself' thing, by that token you should never buy a lotto ticket either but I'm sure a lot of people who would take the $1m would also buy a lotto ticket.

 

[treefingers]

On the 'kicking yourself' thing, by that token you should never buy a lotto ticket either but I'm sure a lot of people who would take the $1m would also buy a lotto ticket.

Can you elaborate? You're not suggesting that buying a $10 lottery ticket and missing out on a 1 in a trillion chance of a millon bucks is equivalent to giving away a guaranteed million...?

 

[Caesar]

It's all about differing marginal utility. Think about it this way:

Guaranteed $1K or 50/50 shot at $100K
Guaranteed $100m or 50/50 shot at $10B

Exact same EV equation for both, but plenty of people (myself included) will make a different decision for each.

Me, I think the difference in marginal utility between $1m and $100m totally justifies the risk. I understand that a lot of people don't, but I'm surprised the poll is so emphatically in favour of the safe option.

 

[rideclutch]

Taking the flip every day, I'm bound to win one eventually...

 

[Bunk Moreland]

It's all about differing marginal utility. Think about it this way:

Guaranteed $1K or 50/50 shot at $100K
Guaranteed $100m or 50/50 shot at $10B

Exact same EV equation for both, but plenty of people (myself included) will make a different decision for each.

Me, I think the difference in marginal utility between $1m and $100m totally justifies the risk. I understand that a lot of people don't, but I'm surprised the poll is so emphatically in favour of the safe option.

Maybe a bit of a cultural illustration? Australians possibly have fairly down-to-earth aspirations re wealth? I dunno, maybe it just translates as "mega rich would be sweet, but ill take being comfortable without risk".

I just say as being Australian is prob the one thing all the respondents have in common. Be interesting if you asked in another country with similar average wealth and income levels

 

[MWPP]

1$ Million honestly wouldn't be life-changing for me personally
I'd go for the 50/50 with no regrets if I missed out- I think I'd be a little relieved to be honest :S

 

[Sanders]

The thing about $1m is, despite what a lot of people say, it’s definitely life-changing for most people.

It allows you to easily buy a very comfortable home in this country. That eliminates your single biggest living expense (mortgage / rent) for the rest of your life. A hell of a lot of people are chained to jobs in order to pay mortgages.

It opens up a massive amount of freedom re your the direction you may wish to take in your career and your life.

Being entirely honest, most people is a very subjective term in your explanation

What you really mean is "most people like me"

It probably depends on your circumstances and attitude to risk/reward

 

[Sanders]

No, not actually.

I’m well aware of the “90% of businesses fail” cliché. It’s more a myth than a fact. I’d like to see some actual stats to back it up, because nobody ever has any.

If you've never seen the #'s on business failure its because you've never looked, not that they're a myth

Also says something about your "well planned" business

 

[checkraiseulite]

gobsmacked at the results of this poll.

 

[BomberFletch31]

99% chance of getting $100mil and you wouldn't take it? Not sherrif serious.....

Deadly.

I have nothing. $1 million will set me up quite nicely. $100 million would be nice, but if I took the gamble and lost, and end up with nothing, I'll forever be kicking myself for not taking that $1 million.

If I already had a million, then another million is lose change, and I'd take that gamble. But as someone with a four figure credit card debt, I'll take the guaranteed $1 million, thanks.

 

[checkraiseulite]

take the 50pc chance and sell it to a rational person. ez game.

 

[Jmac2225]

Deadly.

I have nothing. $1 million will set me up quite nicely. $100 million would be nice, but if I took the gamble and lost, and end up with nothing, I'll forever be kicking myself for not taking that $1 million.

If I already had a million, then another million is lose change, and I'd take that gamble. But as someone with a four figure credit card debt, I'll take the guaranteed $1 million, thanks.

This is a perfect example of why there is no right or wrong answer to this question. It all depends on personal circumstances.

The 1k to 100k ratio was a good example. I make 1k in a week so I would take the risk with out thinking twice.

It will probably take me 20 years to make million (allowing for advancing my career to a much higher pay bracket) which woukd never accumulate to said million anyway. So there is no way I would risk one million just to be a greedy bugger.

 

[wce4premiership]

You've got to risk it to get the biscuit ... but I'd rather be assured of some crumbs.

 

[wce4premiership]

1 million, at this stage of my life each and every time.

-Would allow me to live out the remainder of my uni degree renting a nice house, and not having to worry about budgeting for food/utilities/internet

Why rent though? Could get a decent house with plenty of room to play.